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A Value Menu for Mc Donald s
Pershing SquareCapi t a l Managem ent
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1
DISCLAIMER
Pershing Square Capital Management's ("Pershing") analysis and conclusions regarding
McDonald's Corporation ("McDonald's") are based on publicly available information. Pershing
recognizes that there may be confidential information in the possession of the Company and its
advisors that could lead them to disagree with the approach Pershing is advocating.
The analyses provided include certain estimates and projections prepared with respect to, among
other things, the historical and anticipated operating performance of the Company. Such
statements, estimates, and projections reflect various assumptions by Pershing concerning
anticipated results that are inherently subject to significant economic, competitive, and otheruncertainties and contingencies and have been included solely for illustrative purposes. No
representations, express or implied, are made as to the accuracy or completeness of such
statements, estimates or projections or with respect to any other materials herein. Actual results
may vary materially from the estimates and projected results contained herein.
Pershing manages funds that are in the business of trading - buying and selling - public securities.It is possible that there will be developments in the future that cause Pershing to change its position
regarding the Company and possibly reduce, dispose of, or change the form of its investment in the
Company. Pershing recognizes that the Company has a stock market capitalization of
approximately $42bn, and that, accordingly it could be more difficult to exert influence over its
Board than has been the case with smaller companies.
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2
Table of Contents
C. McOpCo Financial Analysis 74
B. PF McDonald's Financial Analysis 66
A. Pershings Proposal: Assumptions 59
Appendix 58
V. Developing a Response to the Company 43
IV. Company Response to Pershing 39
III. Pershings Proposal to McDonald's: McOpCo IPO 23
II. Pershings View of McDonald's 11
I. Overview of McDonald's 3
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I. Overview of McDonald's
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4
Persh ing s Invo lvement w i t h McDonald s
On Sept em ber 22nd, Pershing Square Capi ta lManagement ( Persh ing ) presented a proposa l for
inc reas ing shareholder va lue ( the Proposal ) toMc Donald s managem ent
f Pershing commends McDonalds management for its strong operational
execution over the past two years
f Pershing appreciates the willingness and openness of McDonalds
management to discuss the Proposal
f Management has taken our Proposal seriously our Proposal was
presented to McDonalds Board of Directors
Persh ing had a fo l low -up meet ing w i th Mc Donald smanagement on Oc t ober 31 when t he Companycom munica t ed i t s response to our P roposa l
Persh ing is pleased to have the oppor t un i ty t o share thede ta i l s o f our Proposa l w i th t he b roader i nves tm entc o m m u n i t y
I. Overview of McDonalds
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5
Review of Mc Donald s
World s la rges t foodserv ic e f ranch isor and re t a i le r
f $42 billion equity market value
f $55 billion in estimated system wide sales
f 32,000 system wide restaurants, globally
f Serves 50 million customers daily in 119 countries
Everyday 1 out of 14 Americans eats at a McDonalds
One of the w or ld s most rec ognized brands
f Consistently named in the top 10 global brands along with Coke and Disney
One o f t he la rgest re t a i l p roper t y ow ners in the w or ld
f Estimated owned and controlled real estate market value of $46 billion (1)
f Estimated 18,000 restaurants where McDonalds owns land and/or building
Sign i f i cant f ree c ash f low bus iness
________________________________________________
(1) Based on Pershings assumptions. See page 64 in the appendix.
I. Overview of McDonalds
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His to r ic a l F inanc ia l Per fo rmanc e
McDonald s His tor ica l Revenue and EBITDA Per formanc e (1 )
($ in millions)
Following declines in same-store sales and profitability in 2001 and 2002, Management has improvedoperations through product innovation, capital discipline and strong execution. As a result, the Companys
profitability has increased.
Same-storeSales Growth 0.6% (1.3%) (2.1%) 2.4% 6.9%
I. Overview of McDonalds
$5,183$4,512$3,997$4,041$4,144
$19,065
$17,141$15,406$14,870$14,243
$0
$5,000
$10,000
$15,000
$20,000
2000 2001 2002 2003 2004
Revenue/EBITDA
24.0%
25.5%
27.0%
28.5%
30.0%
EBITDAMargin
EBITDA Revenue EBITDA Margin________________________________________________
(1) EBITDA is adjusted for certain non-recurring and non-cash items.
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Hist or ic a l Financ ia l Per form anc e (Cont d)
Hist or ic al Pre-Tax U nlevere d Free Cash Flow (1 ) Per formance($ in millions)
As a result of the Companys improved capital allocation, pre-tax unlevered free cash flow hasincreased from a five-year low of $2.0 billion in 2002 to $3.5 billion in 2004.
_______________________________________________
(1) Denotes Adjusted EBITDA CapEx. Adjusted EBITDA is adjusted for certain non-recurring and non-cash expenses.
$2,199$1,994
$3,205$3,483
$2,134
15.4%14.4%
12.9%
18.7% 18.3%
$0
$1,000
$2,000
$3,000
$4,000
2000A 2001A 2002A 2003A 2004A
EBITDA
CapEx
10%
14%
18%
22%
26%
Margin(%)
EBITDA CapEx Margin %
I. Overview of McDonalds
2000 2001 2002 2003 2004
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St ock Pr ice Per fo rmanc e
McDonald s Stoc k Pr ice Performanc e
($ per share)
Although McDonald's stock has rebounded from its 2003 lows, it has been range bound in the low$30s for the past five years and is significantly off of its high of $48 per share reached in 1999.
High of $48.32
11/12/99
$10.00
$20.00
$30.00
$40.00
$50.00
11/12/99 07/12/00 03/12/01 11/10/01 07/11/02 03/11/03 11/09/03 07/09/04 03/09/05 11/07/05
I. Overview of McDonalds
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0
50
100
150
200
250
300
350
11/10/00 06/01/01 12/21/01 07/12/02 01/31/03 08/22/03 03/12/04 10/01/04 04/22/05 11/11/05
McDonald's QSR Comp S&P 500(1)
5-Year Indexed St oc k Per form ance
5-Year Indexed Stoc k Per formanc e
Over the past five years, McDonalds has only slightly outperformed the S&P 500 while its QSRpeer group has vastly outperformed the index.
________________________________________________
(1) Includes YUM and WEN.
QSR
MCD
S&P
McDonald's S&P 500 QSR Index
5 Year Indexed Performance 2.4% (9.6%) 177.3%
I. Overview of McDonalds
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10
1 5 . 6 x
2 0 . 4 x
1 6 . 7 x
0 . 0 x
5 . 0 x
1 0 . 0 x
1 5 . 0 x
2 0 . 0 x
2 5 . 0 x
3 0 -D a y A v e ra g e T ra ilin g W E N Y U M(1 )
8.7x
9.3x
8.9x
7.5x
8.0x
8.5x
9.0x
9.5x
10.0x
30-Day Average Trailing WEN YUM(1)
Mc Donald s versus i t s Peers
________________________________________________
(1) McDonalds stock price is based on a 30-day average trailing price as of 11/11/05.
EV / 06 E EBITDA
P / 06 E EPS
Despite McDonaldsstrong real estate
assets, number oneQSR marketposition and leadingbrand, McDonaldstrades at a discount
to its peers.
We believe thisdiscount is due to afundamentalmisconception
about McDonaldsbusiness.
Long-TermEPS Growth 9% 12% 12%
I. Overview of McDonalds
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II. Pershings View of McDonald's
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Mc Donald s : How t he Syst em WorksII. Pershings View of McDonald's
fFranchisor: Franchises brand and collects fee
fOperator: Operates 9,000 McDonalds restaurants
fLandlord: Buys and develops real estate and leases to itsfranchisees
fReal Estate and Franchise estimated pre-tax ROI of 17.5%(1):
fFranchise Fee: 4% ofrestaurant sales
fRent: greater of aminimum rent or a percentage
of restaurant sales (current
avg. ~9% of sales)
fFranchisee bears all
maintenance capital costs
________________________________________________
(1) Illustrative return based on Pershings assumptions for the cost of land and building and approximate average unit sales in 2004.
Landlord, Franc hisor , Rest aurant Operat or Franc hisees
Cost of Land $650k
Cost of Building 650k
Total Cost $1,300k
Est. Average Unit Sales $1,750k
Rent as a % of Sales 9.0%
Franchise Income as % of sales 4.0%
Rental Income $158ranc se ncome
Total Income $228
Unlevered Pre Tax ROIC 17.5%
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A Landlord, Franc hisor and Restaurant Operat or
fMcDonalds controls substantially
all of its systemwide real estate
f Estimated 11,700 restaurants
where McDonalds owns both the
land and buildings and 7,000
restaurants where McDonalds
owns only the buildings (1)
f Estimated $1.3 billion of income
generated from subleases
f Estimated real estate value: $46billion or ~94% of currentEnterprise Value (2)
f Approximately 32,000
restaurants where
McDonalds receives 4% of
unit salesfReported financials have
overstated margins due to
a lack of transfer pricing
Currently not
charged a franchise
fee
Currently not
charged a market
rent
________________________________________________
(1) Assumes that McDonalds owns the land and buildings of 37% of its system wide units and owns the buildings of 22% of its system wide units.(2) Valuation based on Pershing estimates. See page 64 for more detail on real estate valuation.
Franchisor Restaurant Operator Landlord
Real Es t a t e and Franc h ise Bus iness Mc OpCo
II. Pershings View of McDonald's
f Approximately 9,000 Company-
operated restaurants
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Charac t e r is t ic s o f Cash Flow St reams
Franchisor RestaurantsLandlord
Real Esta t e and Franch ise Bus iness
Minimalf Triple net leases
Lowf Limited remodel subsidies as
well as corporate capex
Highf Significant maintenance capex
Maintenance
CapitalRequirements:
Very Stable / Minimal Risk
f Generates the greater of a
minimum rent or a % of sales
(current average ~ 9%)
Stable / Low Risk
f Low operating leverage
f Diverse and global customer
base
Medium Risk
f High operating leverage
f Sensitivity to food costs
RiskProfile
70%90% Margins
f Some real estate
development expenses
30%50% Margins 7%10% Margins(1)
f High food, paper and labor costs
f Rent
f Franchise fee
TypicalEBITDAMargin:
Typical averagecost of capital(2 )
________________________________________________
(1) Typical margins are illustrative restaurant EBITDA margins and assume the payment of a market rent and franchisee fee, similar to a franchisee.(2) Typical betas are Pershing approximations based on selected companies Barra predictive betas. Average cost of capital estimates are illustrative estimates based on average asset betas.
Minimal: 5.75%-6.5%
f Real estate holding companiestypical asset beta: ~.40
f Hard asset collateral
Low: 6.5%-7.5%
f Choice Hotels, Coke and Pepsi
typical asset beta: ~.50-.60
f Highly leveragable
McOpCo
Medium: 8%-9%
fMature QSR typical asset
beta: ~.80-.90
II. Pershings View of McDonald's
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Adjust i ng for Market Rent and Franchise Fees
2004 Tot a l EBITDA Adjus t ed forMarket Rent and Franchise Fees
55%
2004 Tot al EBITDAAs Repor ted
In 2004, McDonalds company-operated restaurants appeared to contribute 46% of total EBITDA.However, once adjusted for a franchise fee and a market rent fee, McOpCo constituted only 22% of totalEBITDA, with the higher multiple Real Estate and Franchise businesses contributing 78% of total EBITDA.
________________________________________________
Note: The analysis assumes that 75% of the total G&A is allocated to the Real Estate and Franchise business and 25% is allocated to McOpCo. McDonalds management hasindicated this is a conservative assumption regarding the Real Estate and Franchise business. Analysis excludes $441 mm of non-recurring other net operating expenses.
.
78%
22% McOpCo
Real Est at e
and Franc hise
2004 EBITDA %McOpCo $2.4bn 46%
Real Estate and Franchise 2.8bn 54%
Total $5.2bn 100%
2004 EBITDA %McOpCo $1.1bn 22%
Real Estate and Franchise 4.0bn 78%
Total $5.2bn 100%
46%
54%
McOpCo
Real Est at e
and Franc hise
II. Pershings View of McDonald's
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Adjust i ng for Market Rent and Franchise Fees(Contd)
2005E Tota l EBITDA Capex Ad justedfor Market Rent and Franchise Fees
2005E Tota l EBITDA CapexAs Repor ted
Once adjusted for market rent and franchise fees, McOpCo would be contributing only 14% of totalEBITDA-Maintenance Capex, with the Real Estate and Franchise business contributing 86% of totalEBITDA-Maintenance Capex ,based on FY 2005E projections.
________________________________________________
The analysis assumes that 75% of the total G&A is allocated to the Real Estate and Franchise business and 25% is allocated to McOpCo. McDonalds
management has indicated this is a conservative assumption regarding the real estate and franchise business. In addition, we note that 2005E maintenance capexincludes certain one-time capital expenditures related to systemwide remodeling program. Please see appendix for full reconciliation.
'05 EBITDA-
Maint. Capex %McOpCo $1.9bn 47%
PF McDonald's 2.2bn 53%
Total $4.1bn 100%
'05 EBITDA-
Maint. Capex %McOpCo $0.6bn 14%
PF McDonald's 3.5bn 86%
Total $4.1bn 100%
II. Pershings View of McDonald's
53%47%
McOpCo
Real Est ate and
Franchise
86%
14%
McOpCoReal Est ate and
Franchise
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Hist or ic a l EBITDA by Business Type:
Assuming 75% of G&A is allocated to the Real Estate and Franchise business, an allocation thatMcDonalds management indicates is conservative, we indicate below the EBITDA for McOpCo and theReal Estate and Franchise businesses, as depicted in the reported financials. We note that McOpCo hashistorically appeared to contribute approximately ~45% of consolidated EBITDA.
Mc Donalds Consol idat ed EBITDA($ in millions)
________________________________________________
Assumes McOpCo G&A to be 25% of consolidated G&A and Real Estate and Franchise G&A to be 75% of consolidated G&A. Management has indicated this is a conservativeassumption regarding the Real Estate and Franchise business.
RealEstate and
Franchise~55%
McOpCo
~45%
$2,780$2,440$2,156$2,148$2,149
$2,403$2,072
$1,841$1,893$1,995
$5,183$4,512$3,997$4,041$4,144
$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
2000 2001 2002 2003 2004
Real Estate and Franchise McOpCo
II. Pershings View of McDonald's
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(1.1%) (10.6%) (7.9%) 14.0% 20.4%
0.6% (1.3%) (2.1%) 2.4% 6.9% Same-store sales
Hist or ic a l EBITDA by Business Type:
Despite an economic recession in 2001-2003, significant dips in McDonalds system wide same-store sales growth and declines in McDonalds stock prices, the Real Estate and Franchise businesshas grown every year over the last five years.
McDonalds Consol idated EBITDA($ in millions)
________________________________________________
Notes:Assumes McOpCo G&A to be 25% of consolidated G&A and Real Estate and Franchise G&A to be 75% of consolidated G&A.Assumes McOpCo pays franchise fees of 4% of sales and rent of 9% of sales.
(0.5)% 0.1% 0.9% 12.6% 13.4% RE/Franchise Growth
RealEstate andFranchise
~80%
McOpCo Growth
II. Pershings View of McDonald's
$3,138 $3,142 $3,169 $3,568$4,046
$1,006
$1,137
$900 $828$944
$4,144 $4,041 $3,997$4,512
$5,183
$0.000
$1.000
$2.000
$3.000
$4.000
$5.000
$6.000
2000 2001 2002 2003 2004
Real Estate and Franchise McOpCo
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$1.5 $1.6 $1.8 $1.9$2.1 $2.5
$2.6 $2.7 $2.9$3.2 $3.1 $3.1 $3.2
$3.6 $4.0$0.5 $0.5 $0.6 $0.6
$0.7$0.7 $0.8
$0.8$1.0
$1.0 $1.0 $0.9 $0.8$0.9
$1.1
$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
McOpCo
Real Estate andFranchise
Real Est at e and Franchise Business:
Mc Donalds Consol idat ed EBITDA($ in billions)
(15.6%) 30.5% 28.3% 16.9% 2.6% 54.3% 0.6% 5.2% 60.9% 5.0% (15.7%) (22.1%) (39.3%) 54.4% 29.1%Change in Year-EndStock Price:
2.3% 18.1% (2.2%) 17.0% 14.1% 3.6% 6.3% 18.0% 5.1% (1.1%) (10.6%) (7.9%) 14.0% 20.4%McOpCoEBITDA Growth
Real Estate & FranchiseEBITDA Growth:
4.9% 11.7% 8.5% 10.4% 15.3% 4.0% 4.3% 10.1% 7.4% (0.5%) 0.1% 0.9% 12.6% 13.4%
Based on Reported FinancialsBased on Pershing Assumptions
________________________________________________
Notes:Assumes McOpCo G&A to be 25% of consolidated G&A and Real Estate and Franchise G&A to be 75% of consolidated G&A.Assumes McOpCo pays franchise fees of 4% of sales and rent of 9% of sales.
II. Pershings View of McDonald's
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Hist or ic a l Perspect ives on Mc OpCo
McDonald s d id not h is tor ica l ly opera te res taurants
The Company in i t ia l ly entered t he business of operat ingrestaurant s only as a defensive measure
f Limited number of restaurants
The idea emerged that we should operate a base of ten or so stores as a
company. This would give us a firm base of income in the event the
McDonald brothers claimed default on our contract (1)
--Ray Kroc / Founder
Expans ion o f McOpCo uni ts f i rs t occ ur red in the la te 1960s
f Veteran franchisees were approaching retirement and needed liquidity
f McDonalds stock was provided as a tax-free exchange for the restaurants
Some of our operators had tremendous wealth but no money. And we
were using McDonalds stock that was trading at 25 times earnings tobuy restaurants for seven times earnings (2)
--Fred Turner / Former President and CEO
Turner rea l ized in the m id 70s tha t ow ning too m any McOpCouni ts w as not in t he best in t eres t o f the Company
________________________________________________
(1) From Grinding It Out: The Making of McDonalds, p. 108.(2) FromMcDonalds: Behind the Golden Arches, pgs. 288 - 291.
II. Pershings View of McDonald's
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Super ior Franchisee Econom ic sII. Pershings View of McDonald's
Running a McDonalds is a 363-day-a-year business and an owner/operator,with his personal interests and incentives, can inherently do a better job than a
chain manager.(1)
--Fred Turner / Former President and CEO
Com pany Operat ed Franc hisee Operat ed
St ruc tu re C-Corporation LLC / Partnership
Taxes Corporate level tax No corporate level tax
Leverage 10% - 30% 75% - 90%
Levered Returns Low teens 40% and higher
General m anager Salaried employee/ Owner / Entrepreneur
corporate manager
Illustrative Characteristics of Company Operated versus Franchisee Operated Restaurants (2)
________________________________________________
(1) FromMcDonalds: Behind the Golden Arches, pgs. 288 - 291.(2) Illustrative leverage and equity return figures. Not based on company data.
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III. Pershings Proposal to McDonald's: McOpCo IPO
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Persh ing s Proposal : Mc OpCo IPO (c ont d)
McOpCo
f At the time of IPO, McOpCo signs
market lease and franchise
agreements with Pro Forma
McDonalds (PF McDonalds)
f Resulting Pro Forma McDonalds is a
world-class real estate and franchise
business
McOpCo financials deconsolidated
from PF McDonalds
f Leverage is placed only on PropCo
f FranCo is unlevered, maximizing its credit
rating
PropCo FranCo
Pro Form a
IPO 65%
III. Pershings Proposal to McDonald's:
McOpCo IPO
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McOpCo IPO:A Transformat ional Transact ion
Sign i f icant va lue c reat ion fo r shareho lders
f PF McDonalds would trade at an approximate 37%52% premium overwhere it trades today, in the range of approximately $4550 per share (1)
Creates investor t ransparency
f Deconsolidation provides investors with transparent insight into PF
McDonalds profitability (60% EBITDA margins), attractive FCF profile
(35% levered FCF margins) and world-class real estate/franchise assets
f Separation of McOpCo highlights the significant value of rental income
and franchise fees currently eliminated in consolidation
Enhances management foc us and incent ives a t bo then t i t i es
f Enhances ability to attract and retain top McOpCo management
f Allows PF McDonalds management team to focus on new product
innovation, improved marketing efforts, stronger real estate development
programs and higher quality franchisee performance monitoring / training
An IPO of McOpCo
would have severalpositive strategicand financialimplications forboth Pro FormaMcDonalds as wellas McOpCo.
III. Pershings Proposal to McDonald's:
McOpCo IPO
________________________________________________
(1) Based on recent stock price of $33 per share.
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Standalone Pro Forma
$ in millions FY 2006E FY 2006E
Revenue $20,816 $7,393
EBITDA 5,594 4,464
EBITDA Margin 26.9% 60.4% 15% - 20%
EBITDA-Capex 4,335 3,739
EBITDA-Capex Margin 20.8% 50.6% 7.5% - 12.5%
EBITDA-Maintenance Capex 4,651 4,025
EBITDA - Maint. Capex Margin 22.3% 54.4% 10% - 15%
FCF(1)
3,059 2,440
FCF Margin 14.7% 33.0% 5% - 10%
A Transformat iona l Transact ion (Cont 'd)
Improves operat ing and f inanc ia l met r ics a t every leve l
f Significantly improves PF McDonalds EBITDA and free cash flow margins
f Enhances return on capital and overall capital allocation for the PF McDonaldsf Improves ability of PF McDonalds to pay significant ongoing dividends
________________________________________________
We note that CapEx projections are net of proceeds obtained from store closures.(1) Typical QSR margin based on Wall Street estimates for YUM! Brands and Wendys.
III. Pershings Proposal to McDonald's:
McOpCo IPO
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A Transformat iona l Transact ion (Cont 'd)
Al low s for a vo ice in McOpCo through governance
f Given its 35% stake in McOpCo post spin-off, PF McDonalds will be able to
elect several Board seats to the new entityf Governance affords visibility in McOpCo operations, which will help in:
managing the McDonalds brand
extending new products through the franchisee system
remaining in touch with unit-level economics and issues
Suppor t ed by h ighly s imi lar , succ essfu l precedent
t ransac t ions
f Coca Cola Company carved-out its owned bottling operations in 1986 in what is
widely viewed as one of the most successful restructurings of all time
f PepsiCo followed suit in a similar transaction in 1999, with unanimous support
from the Wall Street research analyst community
Al low s for an acc e lera ted McOpCo ref ranch is ing program
Inc reases overa l l s ize of PF Mc Donald s invest or base
f Strong potential to attract both dividend / income-focused investors and real
estate-focused investors
An IPO of McOpCo
would have severalpositive strategicand financialimplications for bothMcDonalds as wellas McOpCo.
III. Pershings Proposal to McDonald's:
McOpCo IPO
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Pro Forma Typical Mature
QSR(1)
TypicalReal EstateC-Corp
ChoiceHotels
2005E Operating Metrics:
EBITDA Margins 60% ~15% - 20% ~70% - 80% 66% 23% 31%
EBITDA CapEx Margins 50% ~7.5 % - 12.5% ~65% - 75% 61% 18% 27%
EPS Growth 9% ~10% - 12% NA 16% 11% 9%
Trading Multiples
Adjusted Enterprise Value(2)
/
CY 2006E EBITDA ~8.5x - 9.5x ~13x - 16x 15.1x 12.3x 12.6x
CY 2006E EBITDA CapEx ~12x - 15x ~17x - 20x 16.0x 15.5x 14.2x
Price /
CY 2006E EPS ~15x - 19x NA 24.3x 20.1x 18.8x
CY 2006E FCF(3) ~16x - 20x ~20x - 25x 24.0x 20.8x 18.9x
Leverage Multiples
Net Debt / EBITDA ~0.5x - 1.8x ~5x - 10x 1.7x 0.0x NM
Total Debt / Enterprise Value ~7.5% - 20% ~35% - 60% 11% 4% 4%
High Branded Intangible Property
Publ ic ly Traded Comparable Companies
PF McDonalds operating metrics are much closer to a typical Real Estate C-Corporation or a highbranded intellectual property business such as PepsiCo or Coca-Cola than they are a typical mature QSR.
________________________________________________
Stock prices as of 11/11/05. Projections based on Wall Street estimates.(1) Typical mature QSR based on YUM! Brands and Wendys.(2) Adjusted for unconsolidated assets.(3) FCF denotes Net Income plus D&A less CapEx.
III. Pershings Proposal to McDonald's:
McOpCo IPO
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REITs: Typ ic a l Trad ing Mul t ip les
We believe REITs trade in the range of 13x-17x EV/06E EBITDA, depending on the type ofreal estate and the businesses the properties support.
________________________________________________Based on Wall Street research estimates at the time of Pershings initial Proposal to the Company.
EV / '06E Div. P / '06E P / '06E
Company EBITDA Yield FFO AFFO
Health Care 14.7x 6.3% 12.6x 13.3x
Industrial 16.3x 4.2% 13.9x 17.2x
Multifamily 17.0x 4.8% 16.6x 19.4x
Office 15.2x 4.7% 13.8x 19.6x
Regional Mall 16.3x 3.8% 14.2x 16.9x
Self Storage 17.5x 3.8% 16.7x 18.3x
Strip Center 15.5x 4.5% 14.4x 16.5x
Triple Net Lease 13.1x 6.4% 12.8x 13.4x
REIT Industry Total / Wtd. Avg. 15.7x 4.8% 14.4x 16.8x
III. Pershings Proposal to McDonald's:
McOpCo IPO
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Sign i f ic ant Va lue Creat ion for Shareholders
Based on relevant
publicly tradedcomparable companies,including several realestate holding C-Corporations, Pro FormaMcDonalds would tradein the range of 12.5x13.5x EV/CY 06EEBITDA. We believe PFMcDonalds would tradeat a 37%52% premiumover where it tradestoday.
________________________________________________
(1) Assumes $1.35 bn of net debt allocated to McOpCo and $5.0 bn of net debt allocated to PF McDonalds. In addition, assumes $9.7 bn of incremental leverage placed onPF McDonalds.
(2) Represents 35% of the market equity value of McOpCo.(3) Assumes incremental leverage and the after-tax proceeds from McOpCo IPO (net of fees and expenses) are used to buy back approximately 316 mm shares at an average price of $40.(4)
Assumes a recent stock price of $33.(5) P / FY 06E FCF multiple adjusted for Pro Forma McDonalds 35% stake in McOpCo.
III. Pershings Proposal to McDonald's:
McOpCo IPO
$ in millions Low High
EV/'06E EBITDA Multiple Range 12.5x 13.5x
Enterprise Value $55,799 $60,263
Less: Net Debt (12/31/05E) (1) 14,650 14,650
Plus: Remaining Stake in McOpCo (2) 2,097 2,493
Equity Value $43,247 $48,106
Ending Shares Outstanding (12/31/05E)(3)
957.3 957.3
Price Per Share $45 $50
Premium to recent price (4) 36.9% 52.3%
Implied P/FY 2006 EPS Multiple 19.9x 22.2x
Implied P/FY 2006 FCF Multiple (5) 19.8x 21.9x
Implied FCF / Dividend Yield 5.1% 4.6%
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McOpCo Va lua t ion Summ aryand Pot ent ia l IPO Proc eeds
McOpCo would likely be valued at $6.0 billion to $7.1 billion of equity market value or 6.5x7.5x EV/06E EBITDA.
________________________________________________(1) See appendix for McOpCo IPO after-tax proceeds schedule.
III. Pershings Proposal to McDonald's:McOpCo IPO
Mc OpCo Financ ia l Sum mar y
$ in millions
McOpCo Financial Summary FY 2006E
Company operated revenues $15,429
Segment EBITDA, pre G&A 1,690
EBITDA Margin, pre G&A 11.0% Assumed G&A for McOpCo 560
Assumed G&A as a Percentage of Total G&A 25.0%
EBITDA post G&A $1,130
EBITDA Margins 7.3%
Net Income $308
EPS $0.24
M c O p Co Va lu a t i o n Su m m a r y
$ in millions Low High
EV/'06E EBITDA Multiple Range 6.5x 7.5x
McOpCo Enterprise Value $7,343 $8,472
Net Debt (12/31/05) 1,350 1,350
Equity Value of McOpCo $5,993 $7,122
Ending Shares Outstanding 1,274 1,274
Price per share $4.70 $5.59
Estimated After-Tax IPO Proceeds (1) $3,042 $3,497
See appendix for after-tax IPO proceeds schedule
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Pro Forma Mc Donald s : Va luat ion Summ ary
The valuation of PF McDonalds suggests a valuation range of $45$50 per share. Based on the midpoint of thevaluation analysis, PF McDonalds could be worth $47.50 per share, a 44% premium over where it trades today.
________________________________________________
(1) Assumes $1.35 billion of net debt allocated to McOpCo and $5.0 billion of net debt allocated to PFMcDonalds. In addition, assumes $9.7 billion of incremental leverage placed on PF McDonalds.
(2) Represents 35% of the market equity value of McOpCo.(3) Assumes incremental leverage and the after-tax proceeds from McOpCo IPO (net of fees and
expenses) are used to buy back approximately shares 316 million shares at an average price of $40.(4)
Assumes a recent stock price of $33.(5) P / FY 06E FCF multiple adjusted for Pro Forma McDonalds 35% stake in McOpCo.(6) Fees and expenses associated with the IPO and financing transactions.
III. Pershings Proposal to McDonald's:McOpCo IPO
PF McDonald 's Sum m ary Financia ls$ in millions
Financial Summary FY 2006E
Franchise Revenue $2,275
Real Estate Revenue 5,118
Total Revenue $7,393
Franchise EBITDA, Pre G&A $2,275
Real Estate EBITDA, Pre G&A 3,869
Less: Allocated G&A 1,680
Assumed G&A as a Percentage of Total G&A 75.0%
Total EBITDA $4,464
EBITDA Margins 60.4%
Net Income 2,141
EPS $2.27
PF Mc Donald 's Valuat ion
$ in millions Low High
EV/'06E EBITDA Multiple Range 12.5x 13.5x
Enterprise Value $55,799 $60,263
Less: Net Debt (12/31/05E)(1)
14,650 14,650
Plus: Remaining Stake in McOpCo(2)
2,097 2,493
Equity Value $43,247 $48,106
Ending Shares Outstanding (12/31/05E)(3)
957.3 957.3
Price Per Share $45 $50
Premium to recent price (4) 36.9% 52.3%
Implied P/FY 2006 EPS Multiple 19.9x 22.2x
Implied P/FY 2006 FCF Multiple (5) 19.8x 21.9x
Implied FCF / Dividend Yield 5.1% 4.6%Memo:Share Buyback:
Incremental Debt Issued $9,685
Less Transaction Fees and Expenses (6) ($300)
Approximate Cash Received From IPO, after Tax $3,270
Total Funds Available for Repurchase $12,654
# of shares repurchased (mm) 316
Average price of stock purchased $40
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3.5x
11.3x
6.1x
10.2x
8.1x
0.0x
3.0x
6.0x
9.0x
12.0x
Brookfield Properties British Land Land Securities Forest City Enterprises
25%
48%56%
35%
59%
0%
25%
50%
75%
100%
Brookfield Properties British Land Land Securities Forest City Enterprises
Com par ing PF Mc Donald s Cred i t St a t s w i t hCompar able Real Est at e Hold ing C-Corpora t ions
Tot al Debt / 05E EBITDA (1 )
Debt / Enterpr is e Value
EBITDA/Interest: 5.8x (2) 2.3x 1.5x 2.5x NA
Rating: BBB BBB NR BB+
Pro Forma
Pro Forma
________________________________________________
(1) Based on Wall Street research estimates. Pro Forma McDonalds EV assumes a valuation multiple of 13x EV/FY06 EBITDA.(2) Assumes an average 5% fixed rate on PF McDonalds debt.
III. Pershings Proposal to McDonald's:McOpCo IPO
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Credi t Rat ings of Large Publ ic REITs
A review of large REITs indicates that these businesses support investment grade ratings with adebt to enterprise value of 36% on average, as compared to Pro Forma McDonalds which wouldhave a debt to enterprise value of 25%.
________________________________________________
Notes:Stock prices as of 11/11/2005.
PF McDonalds EV assumes a valuation multiple of 13x EV/FY06 EBITDA.Total Debt includes Preferred.
III. Pershings Proposal to McDonald's:McOpCo IPO
Total Debt/ Moody's Moody's S&P S&P
Company Name Enterprise Value Rating Outlook Rating Outlook
Simon Property Group Inc. 47.2% Baa2 Stable BBB+ Stable
Equity Office Properties Trust 50.9% Baa3 Stable BBB+ Stable
Vornado Realty Trust 37.4% Baa3 Stable BBB+ Stable
Equity Residential 38.4% Baa1 Stable BBB+ StablePrologis 31.5% Baa1 Stable BBB+ Stable
Archstone-Smith Trust 33.5% Baa1 Stable BBB+ Stable
Boston Properties Inc. 36.0% NR NR BBB+ Stable
Kimco Realty Corp. 25.2% Baa1 Stable A- Stable
AvalonBay Communities Inc. 27.3% Baa1 Stable BBB+ Stable
Median Total Debt/EV 36%
Average Total Debt/EV 36%
PF McDonald's Total Debt/EV 25%
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Pro Form a Mc Donalds Has A Superior Credi tProf i le t o a Typ ic a l REITIII. Pershings Proposal to McDonald's:
McOpCo IPO
Despi t e being a C-Corp and lac k ing t he t ax
advan t ages o f a REIT, PF Mc Donal ds hassevera l super io r c red i t charac t er i st i cs
fREITs are required to pay 90% of earnings
through dividends, whereas Pro Forma McDonaldshas much more credit flexibility
fPF McDonalds has significant brand value to support
its cash flows and overall credit
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Company Response t o PershingIV. Company Response to Pershing
McDonald s asked i t s Adv isors t o he lp rev iew theProposal
Goa l w as to rev iew the proposal to assess 4 c r i t i ca lareas:
Advisors reported back with judgments on
f (1) Valuation
f (2) Credit Impact
McDonalds Management reviewed the Proposal to assess
f (3) Friction Costs
f (4) Governance / Alignment Issues
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Management Concerns: Fr ic t ion Cost s , Cred i tImpac t and Governance Issues
Fr ic t ion Costs Cred i t Impac t Al ignment Issues
Some f r i c t ion cos tsassoc ia ted w i th the CMBSf inanc ing s t ruc tu re , bu t no t agat ing issue
f Potential property tax
revaluations
f Legal costs
f Large transaction for CMBS
market
fMostly driven by CMBS
financing
Increm enta l $9bn of leverageas proposed may putpressure on cred i t ra t ing
f Rating agency consolidation
of McOpCo
f Lease commitments viewed
as leverage
Separat ion o f McOpCo f romPF Mc Donalds m ay ca usea l ignment i ssues in the
sys tem
McDonalds management stated that, assuming adequate valuecreation, none of these issues would prevent a restructuring
IV. Company Response to Pershing
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Valuat ion: Judgm ents Made by Advisors
f Advisors were assigned to review the Proposal
f In general, Advisors agreed with Pershing on:
9McOpCo valuation
9Relative allocation of EBITDA between
McOpCo and PF McDonalds
f However, their judgment was that PF
McDonalds would not enjoy significant multiple
expansion
PF McDonalds would trade like arestaurant stock
IV. Company Response to Pershing
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V. Developing a Response to the Company
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Pershings Response Regarding Fr ic t ion Cost sand Cred i t Im pact
Fr ic t ion Costs Cred it Impac t
9 Friction costs immaterial in the context
of value creation
9 Friction costs and transaction delays
were driven by CMBS financing
9 Similar transaction could be effected
with corporate debt
9 Stability of PF McDonalds cash flow
stream and robust asset base should
allow it to incur additional debt withouta material adverse change in rating
9YUMs credit rating is BBB-
V. Developing a Response to theCompany
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Franch isee A l ignment : Sk in in the GameV. Developing a Response to the
Company
Franc hisor /Franc hisee Conf l ic t
f Top Line (percent of sales) vs. Bottom Line
Some be l ieve th is c onf l i c t i s m i t iga t ed by ow ning andoperat ing un i t s
How ever , many o f the m ost succ essfu l franch isorsoperat e few , i f any, un i ts
f Historical McDonalds
f Subway
f Dunkin Donuts
f Tim Hortons
McDonald s cu r rent sk in in t he game is overs ta ted dueto lack o f t ransfer pr ic ing
f We believe McOpCo represents ~10% of McDonalds total value
PF Mc Donalds role as landl ord, f ranc hisor, 35%shareho lder and board member , leaves them w i th am ple
sk in in the game
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Franch isee A l ignment :
Benef i ts t o Franc hisees of an independentMcOpCo
V. Developing a Response to theCompany
McOpCo IPO w ou ld sh if t some pow er to t he f ranch isebaseA good t h ing
f Franchisees know whats best operationally
f Franchisees have been the source of most product innovations (i.e. Big
Mac, Egg McMuffin, Filet-o-Fish, Apple Pie)
f Driving force behind current process innovations (call centers at drive-
thru)
f
IPO would sharpen focus on being best in class franchisor
Leve l the p lay ing f ie ld : McOpCo shou ld com pete on thesame basis as f ranchisees
f Pay market rent and franchise fees
f Be focused on bottom-line profitability
f Be run by equity compensated management
Oppor tun i ty fo r Franch isees t o expand un i t count
f Heavy demand among operators to acquire/manage additional units
f McOpCo should refranchise units better managed by franchisees
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Valuat ion of PF Mc Donald sV. Developing a Response to theCompany
Although there are some differences in opinion
regarding friction costs, leverage and potential
alignment issues, the key disparity betweenPershing and the Companys views was
regarding the Valuation of Pro Forma McDonalds
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PF Mc Donald s FY20 05E EBIT DApre-G&A Contr ibut ion
Pro Form a Mc Donald s is
Not a Rest aurant Com pany
V. Developing a Response to theCompany
37%
63%
Real Est a t e
Brand Royal t y
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Pro Forma Typical
Real EstateC-Corp
ChoiceHotels
TypicalMature QSR
2005E Operating Metrics:
EBITDA Margins 60% ~70% - 80% 66% 23% 31% ~15% - 20%
EBITDA CapEx Margins 50% ~65% - 75% 61% 18% 27% ~7.5 % - 12.5%
EPS Growth 9% NA 16% 11% 9% ~10% - 12%
Trading Multiples
Adjusted Enterprise Value(2)
/
CY 2006E EBITDA 13.0x ~13x - 16x 15.1x 12.3x 12.6x ~8.5x - 9.5x
CY 2006E EBITDA CapEx 15.5x ~17x - 20x 16.0x 15.5x 14.2x ~12x - 15x
Price /
CY 2006E EPS 21.1x NA 24.3x 20.1x 18.8x ~15x - 19xCY 2006E FCF (3) 20.9x ~20x - 25x 24.0x 20.8x 18.9x ~16x - 20x
Leverage Multiples
Net Debt / EBITDA 3.4x ~5x - 10x 1.7x 0.0x NM ~0.5x - 1.8x
Total Debt / Enterprise Value 24% ~35% - 60% 11% 4% 4% ~7.5% - 20%
Com parable Companies
PF McDonalds operating metrics are much closer to a typical Real Estate C-Corporation or a highbranded intellectual property business such as PepsiCo or Coca-Cola than they are a typical QSR.
High Branded Intangible Property
V. Developing a Response to theCompany
Assumes PF
McDonaldsprice of ~$47.50
________________________________________________
Stock prices as of 11/11/05. Projections based on Wall Street estimates.(1) Typical mature QSR based on YUM! Brands and Wendys.(2) Adjusted for unconsolidated assets.(3) FCF denotes Net Income plus D&A less CapEx.
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McDonald's Stock Price $33.00 $37.00 $41.00 $45.00 $49.00 $53.00 $57.00
McOpCo Share Price (7x EV / EBITDA Multiple) $5.15 $5.15 $5.15 $5.15 $5.15 $5.15 $5.15
Implied Pro Forma McDonald's Share Price 27.85 31.85 35.85 39.85 43.85 47.85 51.85
Yield on Pro Forma McDonald's 6.7% 5.9% 5.2% 4.7% 4.3% 3.9% 3.6%
Signi f i c ant Free Cash Flow Yie ld / Div idend Yie ld
Assuming No Increm enta l Debt
At McDonalds current price of approximately $33 per share, we estimate Pro Forma McDonalds dividend/ FCF yield would be approximately 6.7%. (1)
V. Developing a Response to theCompany
Memo: Pro Forma McDonald's Free Cash Flow
2006E EBITDA $4,464.0
Less: Maintenance Capital Expenditures (438.6)
Less: Growth Capital Expenditures (285.9)Plus / Less: Decreases / (Increases) in Working Capital 6.2
Less: Interest (1) (250.0)
Less: Cash Taxes (1,112.7)
Free Cash Flow $2,383.0
PFMcDonald's Shares Out (assuming no self-tender) 1,273.7
Free Cash Flow per Share $1.87________________________________________________
(1) Assuming PF McDonalds pays out 100% of its FCF as dividends.(2) Assumes no incremental leverage and an average cost of debt of 5% on the existing $5 bn of net debt at Pro Forma McDonalds.
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Based on Reported FinancialsBased on Pershing Assumptions
$1.5 $1.6$1.8 $1.9
$2.1$2.5 $2.6 $2.7
$2.9$3.2 $3.1 $3.1 $3.2
$3.6$4.0
$0.0
$1.0
$2.0
$3.0
$4.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Pro Forma Mc Donalds:
Real Est at e and Franc hise EBITDA($ in billions)
Real Estate & FranchiseEBITDA Growth: 4.9% 11.7% 8.5% 10.4% 15.3% 4.0% 4.3% 10.1% 7.4% (0.5%) 0.1% 0.9% 12.6% 13.4%
________________________________________________
Notes:
Assumes McOpCo G&A to be 25% of consolidated G&A and Real Estate and Franchise G&A to be 75% of consolidated G&A.Assumes McOpCo pays franchise fees of 4% of sales and rent of 9% of sales.
V. Developing a Response to theCompany
Pershing believes the best way to think about Pro Forma McDonalds is as a growing annuity.
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Whic h Would You Rat her Ow n:
Pro Form a Mc Donalds or a Large Ret ai l REIT?V. Developing a Response to theCompany
________________________________________________
Note: Assumes a 7x EV / FY 06E EBITDA multiple on McOpCo.(1) Retail / REIT dividend yield based on Simon Property Group. Illustrative LT Dividend growth based on Pershings estimates.(2) Assumes full payout of free cash flows for PF McDonalds.(3) Assumes 15% tax rate on PF McDonalds dividend and a 35% tax rate on the REIT dividend.(4) Scenario 2 Pre-Tax and After-Tax Yields are adjusted for a 35% stake in McOpCo.
McDonald's Stock Price $33.15 $35.15 $40.15 $45.15 $50.15 $55.15 $60.15 Typical
McOpCo Stock Price 5.15 5.15 5.15 5.15 5.15 5.15 5.15 Large Retail
PF McDonald's Stock Price $28.00 $30.00 $35.00 $40.00 $45.00 $50.00 $55.00 REIT(1)
Scenario 1: Pre-Tax Yield(2)
6.7% 5.9% 5.2% 4.7% 4.3% 3.9% 3.6% 4.0%
No Sharebuyback
No Incremental After-Tax Investor Yield(3)
5.7% 5.0% 4.4% 4.0% 3.6% 3.3% 3.1% 2.6%
Leverage
Estimated LT Dividend Growth 3% - 4% 3%- 6%
Scenario 2 PF McDonald's Stock Price $28.00 $30.00 $35.00 $40.00 $45.00 $50.00 $55.00
Proposed Pre-Tax Yield(4)
8.5% 7.9% 6.7% 5.8% 5.1% 4.6% 4.1%
Sharebuyback
After-Tax Investor Yield (4) 7.2% 6.7% 5.7% 4.9% 4.3% 3.9% 3.5%
Estimated LT Dividend Growth 3% - 4%
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McDonald's Stock Price $33.15 $35.15 $40.15 $45.15 $50.15 $55.15 $60.15
McOpCo Stock Price 5.15 5.15 5.15 5.15 5.15 5.15 5.15 10 Year PF McDonald's Stock Price $28.00 $30.00 $35.00 $40.00 $45.00 $50.00 $55.00 Treasury
Scenario 1: Pre-Tax Yield(1)
6.7% 5.9% 5.2% 4.7% 4.3% 3.9% 3.6% 4.6%
No Sharebuyback
No Incremental After-Tax Investor Yield(2)
5.7% 5.0% 4.4% 4.0% 3.6% 3.3% 3.1% 3.0%
Leverage
Estimated LT Dividend Growth 3% - 4% 3% - 4% 0%
Scenario 2 PF McDonald's Stock Price $28.00 $30.00 $35.00 $40.00 $45.00 $50.00 $55.00
Proposed Pre-Tax Yield(3)
8.5% 7.9% 6.7% 5.8% 5.1% 4.6% 4.1%
Sharebuyback
After-Tax Investor Yield (3) 7.2% 6.7% 5.7% 4.9% 4.3% 3.9% 3.5%
Estimated LT Dividend Growth 3% - 4% 3% - 4%
Whic h Would You Rat her Ow n:
Pro Form a Mc Donalds or 10-Year U.S. Treasury?V. Developing a Response to theCompany
________________________________________________
Note: Assumes a 7x EV / FY 06E EBITDA multiple on McOpCo.(1) Assumes full payout of free cash flows for PF McDonalds.(2) Assumes 15% tax rate on PF McDonalds dividend and a 35% tax rate on the 10-Year Treasury dividend.(3) Scenario 2 Pre-Tax and After-Tax Yields are adjusted for a 35% stake in McOpCo.
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McDonald's Stock Price $33.15 $35.15 $40.15 $45.15 $50.15 $55.15 $60.15
McOpCo Stock Price 5.15 5.15 5.15 5.15 5.15 5.15 5.15 10 Year PF McDonald's Stock Price $28.00 $30.00 $35.00 $40.00 $45.00 $50.00 $55.00 TIPS
Scenario 1: Pre-Tax Yield(1)
6.7% 5.9% 5.2% 4.7% 4.3% 3.9% 3.6% 2.1%
No Sharebuyback
No Incremental After-Tax Investor Yield(2)
5.7% 5.0% 4.4% 4.0% 3.6% 3.3% 3.1% 3.0%
Leverage
Estimated LT Dividend Growth 3% - 4% 2.5%
Scenario 2 PF McDonald's Stock Price $28.00 $30.00 $35.00 $40.00 $45.00 $50.00 $55.00
Proposed Pre-Tax Yield(3)
8.5% 7.9% 6.7% 5.8% 5.1% 4.6% 4.1%
Sharebuyback
After-Tax Investor Yield (3) 7.2% 6.7% 5.7% 4.9% 4.3% 3.9% 3.5%
Estimated LT Dividend Growth 3% - 4%
Whic h Would You Rat her Ow n:
Pro Forma Mc Donald s or a Treasury In f la t ionProt ec t ed Sec ur i t y (TIPS)?
V. Developing a Response to theCompany
________________________________________________
Note: Assumes a 7x EV / FY 06E EBITDA multiple on McOpCo.(1) Assumes full payout of free cash flows for PF McDonalds.(2) Assumes 15% tax rate on PF McDonalds dividend and a 35% tax rate on the TIPS dividend.(3) Scenario 2 Pre-Tax and After-Tax Yields are adjusted for a 35% stake in McOpCo.
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Valuat i on o f McDonald s as a Grow ing Annui ty
Based on a review of the cost of capital of Real Estate holding corporations and Intangible Property /Franchise businesses like Coca Cola and Choice Hotels, we believe that Pro Forma McDonalds leveredFCF could have a discount rate in the area 7.25% - 7.75%. As such, we believe PF McDonalds would
have a FCF Yield of 4.25% - 5.25%. This implies a midpoint equity valuation range of $48 per share.
V. Developing a Response to theCompany
________________________________________________
(1)
Assumes no dividend paid in FCF calculation.(2) Includes the value of PF McDonalds 35% equity stake in McOpCo (approx. $2 per share). Assumes a 7x EV / FY 06E EBITDA McOpCo valuation multiple.
Midpoint of PF
McDonaldsEquity Value per
Share(2): $48
Low High
Estimated Discount Rate 7.75% 7.25%
Implied Perpetuity Growth Rate 2.50% 3.00%
Implied FCF Yield 5.25% 4.25%
Implied FCF Multiple 19.0x 23.5x
FY'06E Free Cash Flow per Share (1) $2.17 $2.17
(Note: FCF Assumes Proposal Scenario)
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Conclus ionsV. Developing a Response to the
Company
f McDonalds is significantly undervalued today
Over 80% of its cash flows comes from realestate income and franchise income
f Proposal creates value for several reasons
Increases shareholder value
Improves management focus
Increases transparency
Improves capital allocation
Improves franchise alignment
f There are multiple ways to unlock value
Pershings Initial Proposal
Variations on Pershings Initial Proposal
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Next S tepsV. Developing a Response to the
Company
f Engage constituents regarding proposal
Shareholders
Franchisees
Broad investment community
f Incorporate your feedback
f Consider revised proposal
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V. Developing a Response to theCompany
Q & A
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Appendix
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A. Pershings Proposal: Assumptions
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McOpCo IPO: General Assumpt ions
f 65% of McOpCo shares are IPOed in the transaction
35% stake retained by PF McDonalds allows for McOpCos business to
be deconsolidated
f McOpCo is assumed to be essentially a debt free subsidiary
f Immediately prior to the IPO, $1.35bn of McDonalds consolidated FY 05E
net debt is allocated to McOpCo
$1.5 billion of total debt allocated
$150mm of cash and cash equivalents allocatedf The remaining $5bn of FY 05E net debt is allocated to PF McDonalds
$5.15bn of total debt
$150mm of cash and cash equivalents
f McOpCos tax basis is assumed to be approximately $1.65 billion
Tax basis is equal to $3 billion of initial assumed basis (based on an
assessment of net equipment and other property at McDonalds) less $1.35
billion of allocated net debt
f To the extent that the IPO distribution exceeds PF McDonalds tax basis in
McOpCo, then the tax cost for the IPO would be the amount by which the IPO
distribution exceeds McDonald's basis multiplied by McDonalds corporate and
state/local tax rate
Pershing has assumed
the following structuraland tax assumptionswith respect to an IPO
spin-off of McOpCo.
A. Pershings Proposal: Assumptions
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McOpCo IPO: Struc tu ra l And Tax Observa t ions
Step 1: McOpCo dividends a $4.2bnNote to McDonalds (parent)
Step 2: IPO of McOpCo andTax Costs
Step 3: Leveraged Self-Tender atPro Forma McDonalds
McOpCo
McOpCo
EquityMarkets
FranCo
f McOpCo declares and pays a dividend to
McDonalds (parent) in the form of a Note in an
amount equal to the anticipated proceeds from
an initial public offering of McOpCo
f For illustrative purposes, we assume the Note is
for $4.2bn, or 65% of the equity market value
of McOpCo (assumed to be $6.5bn)
f McOpCo undertakes the IPO and uses the
proceeds to repay the dividend note.
f The tax cost for the IPO would be the amount by
which the IPO distribution exceeded McDonald's
basis in the McOpCo stock multiplied by
McDonalds corporate and state/local tax rate
f Assuming a $4.2bn of IPO distribution, the tax
cost would be approximately $1bn
Tax cost equals $4.2 billion of distribution
less $1.65 billion of basis multiplied by the
tax rate of 38%
f As such, after tax proceeds of the McOpCo IPO
will be approximately $3.2 billion
f PF McDonalds is organized as a real estate
business (PropCo) and a franchise business
(FranCo)
f PropCo issues secured financing with
proceeds used for
Repaying existing debt at PF
McDonalds
Buying back shares
f PF McDonalds performs a self tender using
proceeds from:
New CMBS financings
After tax proceeds of IPO
IPO ofMcOpCoShares
$4.2bnNote
$4.2 bn cash received
McOpCo repays $4.2 bnNote to McDonalds
McDonaldsretains
35% stake
PropCo
Pro Forma
Issues CMBSfinancing, or$9.7bn ofincremental debt
PF McDonaldsperforms aleveraged self-tender
No debt at FranCo
A. Pershings Proposal: Assumptions
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McOpCo IPO Proceeds
Mc OpCo IPO Af ter Tax Proc eeds
Low High Average
Taxes payableMcOpCo Equity Market Value $5,993 $7,122 $6,558
IPO Percentage 65% 65% 65%
Distribution to PF McDonald's $3,895 $4,630 $4,262
Book Basis of McOpCo 3,000 3,000 3,000
Net Debt Allocated to McOpCo (1,350) (1,350) (1,350)
Adjusted Basis in McOpCo 1,650 1,650 1,650
Taxable Gain $2,245 $2,980 $2,612
Tax Rate 38% 38% 38%
Taxes payable $853 $1,132 $993
After Tax Proceeds
Distribution $3,895 $4,630 $4,262
Taxes Payable (853) (1,132) (993)
After Tax Distributions $3,042 $3,497 $3,270
Set forth herein is a
schedule of theafter-tax proceedsfrom the McOpCoIPO.
A. Pershings Proposal: Assumptions
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Col la t era l ized Financ ing
Assuming PF McDonalds owns the land and building of 37% of its system wide units and owns thebuildings of 22% of its system wide units, then a preliminary valuation of McDonalds real estate suggestsa value of $33 billion.
A. Pershings Proposal: Assumptions
Avg. Annual Rev. Est. Market Est. Market Est. Est. Rent Cap Total Real
$ in million Per Unit Rent % Rent $ # of Units Income Rate Estate Value
Property Value
Owns Land and Building 1.75 9.0% 0.16 11,709 1,844.2 7.0% $26,346
Owns Building (Leases Land) 1.75 4.5% 0.08 6,962 548.3 8.0% $6,854
Estimated Property Value $33,200
Est. Rent Est. Est. Rent Cap Total Real
$ in million Spread Per Avg unit # of Units Income, Net Rate Estate Value
Leasehold Value
Leaseholds 0.10 12,975 1,322.8 10.0% $13,228
Estimated Leasehold Value $13,228
Total Real Estate Collateral Value $46,428
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PF McDona lds : Cost o f Cap i ta l
We estimated the asset betas of several Real Estate holding C-Corporations and severalhigh branded intellectual property businesses.
A. Pershings Proposal: Assumptions
Note: Market information as of 11/10/05. Utilized treasury stock method.
Sources: Barra, company reports, Factset, and Wall Street Equity research.
High Branded In tang ib le Proper ty Business Bet as(Dol lar values in m i l l ions)
Adjusted Marginal Total Debt &
Equity Cost of Equity Total Preferred Tax Unlevered Preferred /
Company Beta Equity Value Debt Stock Rate Beta TEV
Coca Cola Co. 0.49 7.3% $101,776.1 $4,200.0 - 38.0% 0.48 4.2%
Pepsico Inc. 0.46 7.2% 99,498.9 4,607.0 41.0 38.0% 0.45 4.7%
Choice Hotels 0.86 9.3% 2,285.7 296.7 - 38.0% 0.79 11.7%
Mean 0.60 7.9% $67,853.6 $3,034.6 $13.7 38.0% 0.57 6.8%
Median 0.49 7.3% 99,498.9 4,200.0 - 38.0% 0.48 4.7%
Real Esta t e Business Betas(Dol lar values in m i l l ions)
Adjusted Marginal Total Debt &
Equity Cost of Equity Total Preferred Tax Unlevered Preferred /
Company Beta Equity Value Debt Stock Rate Beta TEV
British Land 0.62 8.0% $8,913.9 $11,391.1 - 38.0% 0.34 56.8%Brookfield Properties 0.80 9.0% 6,805.9 6,208.0 1,477.0 38.0% 0.45 60.5%
Forest City Enterprises 0.66 8.2% 3,863.9 5,566.0 - 38.0% 0.35 59.3%
Land Securities 0.55 7.7% 12,279.2 6,484.2 - 38.0% 0.42 34.6%
Mean 0.66 8.2% $7,965.7 $7,412.3 $369.3 38.0% 0.39 52.8%
Median 0.64 8.1% 7,859.9 6,346.1 - 38.0% 0.38 58.0%
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68
f Net Unit Growth Approximates 1.5% - 2.0% of total franchise system unit growth annually or 1.0% - 1.5% of systemwide unit growth
f Revenue drivers:
Average systemwide same-store sales CAGR of ~2.5% annually
Rental revenue from franchisees of 9.0% of franchise & affiliated system sales
Rental revenue from McOpCo of 9.0% of McOpCo sales Franchise revenue from franchisees of 4.0% of franchise & affiliated system sales
Franchise revenue from McOpCo of 4.0% of McOpCo sales
f Cost drivers:
Franchise rental expense based on a historical % of rental revenue from franchisees
McOpCo rental expense based on a historical % of rental revenue from McOpCo
D&A calculated assuming a 20-year useful life for existing net depreciable PP&E of approximately $12.5 billion
(excluding land), and a 20-year useful life for depreciable PP&E purchased in the future
75% of SG&A allocated to Pro Forma McDonalds
f Net CapEx drivers:
All CapEx is net of proceeds received from store closures $1.3 million of CapEx for each new unit where Pro Forma McDonalds owns the land and the building in 2005 and 2006,
growing at an inflationary rate of 2.0% thereafter
$650K million of CapEx for each new unit where Pro Forma McDonalds owns the building but not the land in 2005 and
2006, growing at an inflationary rate of 2.0% thereafter
Run-rate maintenance CapEx of approximately $320 million, implying approximately $10K per system wide unit,
growing at 2%
Allocation of 75% of consolidated McDonalds corporate CapEx
Consolidated corporate CapEx held constant at 0.7% of sales
f Other
Incremental total debt of $9.7 billion, resulting in total debt of approximately $14.8 billion (net debt of $14.65bn) Free cash used to buy back shares and pay dividends
$150 mm minimum cash balance
Tax rate of 32%
Minimal working capital requirements
25% Debt to Cap ratio increasing to 30% in 2008
Assumes an illustrative 30% dividend payout ratio to match current consolidated McDonalds
Pro Form a Mc Dona lds : Mode l Key Dr ivers
Set forth herein are
the assumptions forthe Pro FormaMcDonaldsbusiness.
B. PF McDonald's Financial Analysis
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2004 Mc Donald s P& L As Report ed Mc Donald s
B. PF McDonald's Financial Analysis
Set forth below is table which reconciles McOpCos, the Real Estate and Franchise businesses and stand-aloneMcDonalds FY 2004 income statements, as they are currently reported. The analysis demonstrates howMcOpCo is paying neither a market rent nor a franchise fee.
________________________________________________
The analysis assumes that 75% of the total G&A is allocated to the Real Estate and Franchise business and 25% is allocated to McOpCo. To the extent that there shouldbe more G&A allocated to McOpCo, then there would be a greater percentage of total EBITDA at the Real Estate and Franchise business than what is shown here.Note: Analysis excludes $441 mm of non-recurring other net operating expenses.
.
(U.S. $ in millions)
Real Estate 2004
2004 McOpCo and Franchise Consolidated
Income Statement P&L P&L Sum of Parts
Sales by Company Operated Restaurants $14,224 $14,224 $14,224
Rent from Franchise and Affiliate Rest. 3,336 3,336 3,336
Franchise Fees From Franchise and Affiliate Rest. 1,505 1,505 1,505
Total Revenue $19,065 $14,224 $4,841 $19,065
Company Operated Expenses:
Food and Paper 4,853 4,853 - 4,853
Compensation & Benefits 3,726 3,726 - 3,726
Occupancy and Other Expenses (excl. D&A) 2,747 2,747 - 2,747
Company Operated D&A 774 427 347 774
Total Company Operated Expenses $12,100 $11,753 $347 $12,100
Franchised Restaurant Occupancy Costs 576 - 576 576
Franchise PPE D&A 427 427 427Corporate G&A 1,980 495 1,485 1,980
EBIT 3,982 1,976 2,006 3,982
Depreciation & Amortization 1,201 427 774 1,201
EBITDA $5,183 $2,403 $2,780 $5,183
% of Total EBITDA 100% 46% 54% 100%
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2006E Net Capi ta l Ex pendi tures Reconc i l ia t ion
B. PF McDonald's Financial Analysis
Set forth herein is a
table whichdemonstrates net capitalexpenditures bycategory for McOpCo,PF McDonalds and thestandalone(consolidated)
McDonalds.
Note: Our Free CashFlows are derivedusing Net CapitalExpenditures, net ofproceeds received
from closures. Wenote that the Companytypically generates$300 - $400mm ofproceeds annuallyfrom closings.
2006E Net Capi ta l Expendi t ures
(U.S. $ in millions)
Consolidated Pro Forma
McDonald's McOpCo McDonald's
New Restaurants, Net $316 $30 $286
Existing Restaurants 787 465 322
Corporate/Other 156 39 117
Net Capital Expenditures $1,259 $534 $724
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PF Mc Donald s : Sum m ary Inc om e St at em ent
B. PF McDonald's Financial Analysis
Below are the summary projections for Pro Forma McDonalds based on the assumptionsdetailed on page 68.
($ in millions, except per share data)
2006 - 2011
2002A 2003A 2004A 2005E 2006E 2007E 2008E 2009E 2010E 2011E CAGR
Income Statement Data
Revenue $5,401.0 $6,008.5 $6,690.0 $7,124.1 $7,393.1 $7,676.7 $7,969.9 $8,276.2 $8,596.2 $8,930.9 3.9%
% Growth 11.2% 11.3% 6.5% 3.8% 3.8% 3.8% 3.8% 3.9% 3.9%
EBITDA $3,168.7 $3,568.2 $4,046.0 $4,276.7 $4,464.0 $4,653.4 $4,849.3 $5,054.9 $5,270.8 $5,497.5 4.3%
% Margin 58.7% 59.4% 60.5% 60.0% 60.4% 60.6% 60.8% 61.1% 61.3% 61.6%
EBITDA - CapEx 4,046.0 3,312.7 3,739.5 3,909.2 4,085.0 4,258.5 4,440.1 4,630.1 4.4%% Margin 60.5% 46.5% 50.6% 50.9% 51.3% 51.5% 51.7% 51.8%
D&A 774.0 712.3 736.9 768.5 794.5 821.5 849.6 878.8
EBIT $2,492.7 $2,827.4 $3,272.0 $3,564.4 $3,727.0 $3,884.9 $4,054.8 $4,233.4 $4,421.2 $4,618.6 4.4%
% Margin 46.2% 47.1% 48.9% 50.0% 50.4% 50.6% 50.9% 51.2% 51.4% 51.7%
Net Interest Expense (736.6) (801.5) (889.7) (932.5) (971.8) (1,012.7)
Equity Income from OpCo 35.0% 107.9 121.9 137.5 151.7 162.4 171.9
Net Income $2,141.4 $2,218.6 $2,289.8 $2,396.3 $2,507.9 $2,623.9 4.1%
EPS $2.27 $2.47 $2.72 $2.97 $3.24 $3.54 9.3%
Average Shares Outstanding 945.4 897.8 842.8 806.4 773.3 741.8
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PF McDonald s : Sum m ary Cash Flow and Balanc e
SheetB. PF McDonald's Financial Analysis
Below are the summary cash flow projections for Pro Forma McDonalds based on theassumptions detailed on page 68.
($ in millions, except per share data)
2006 - 2011
2002A 2003A 2004A 2005E 2006E 2007E 2008E 2009E 2010E 2011E CAGR
Cash Flow Data
EBITDA $4,464.0 $4,653.4 $4,849.3 $5,054.9 $5,270.8 $5,497.5
less: Cash Taxes (956.9) (986.7) (1,012.8) (1,056.3) (1,103.8) (1,153.9)
less: Cash Interest Expense (736.6) (801.5) (889.7) (932.5) (971.8) (1,012.7)
less: Dividends (653.2) (676.8) (698.5) (731.0) (765.0) (800.4)
less: Change in Working Capital 6.2 6.5 6.7 7.0 7.2 7.5
less: Growth CapEx (285.9) (291.6) (297.4) (314.7) (333.5) (354.0)
less: Maintenance CapEx (438.6) (452.6) (466.9) (481.7) (497.2) (513.4)
plus: After-tax Dividends from McOpCo 0.0 0.0 0.0 0.0 0.0 0.0
Free Cash Flow (post dividends) $1,398.9 $1,450.8 $1,490.7 $1,545.7 $1,606.7 $1,670.6
Free Cash Flow (pre dividends) 2,052.1 2,127.6 2,189.2 2,276.7 2,371.7 2,471.0
FCF per Share (pre dividends) $2.17 $2.37 $2.60 $2.82 $3.07 $3.33 8.9%
Illustrative Stock Price at 20x LTM FCF $43.41 $47.40 $51.95 $56.47 $61.34 $66.63
20
Balance Sheet Data
Cash 150.0 150.0 150.0 150.0 150.0 150.0 150.0
Revolver 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Long-Term Debt $14,800.0 14,800.0 17,393.4 18,331.6 19,104.0 19,904.5 20,740.4
Total Debt / Capitalization 24.5% 26.8% 30.0% 30.0% 30.0% 30.0% 30.0%
Total Debt / EBITDA 3.5x 3.3x 3.7x 3.8x 3.8x 3.8x 3.8x
Net Debt / EBITDA 3.4x 3.3x 3.7x 3.7x 3.7x 3.7x 3.7x
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C. McOpCo Financial AnalysisMcOpCo Summ ary Income Sta t emen t
Set forth below are the summary projections for McOpCo based on the assumptions detailed on page 76.
(U.S. $ in millions)
2006 - 2011
2004A 2005E 2006E 2007E 2008E 2009E 2010E 2011E CAGR
Income Statement Data
Revenue $14,223.8 $15,042.4 $15,428.9 $15,838.3 $16,259.2 $16,692.0 $17,136.9 $17,594.4 2.7%
% Growth 11.2% 5.8% 2.6% 2.7% 2.7% 2.7% 2.7% 2.7%
EBITDA $1,136.7 $1,085.7 $1,129.6 $1,173.3 $1,218.5 $1,265.4 $1,313.9 $1,364.2 3.8%
% Margin 8.0% 7.2% 7.3% 7.4% 7.5% 7.6% 7.7% 7.8% EBITDA - CapEx 1,136.7 562.5 595.6 628.1 662.0 697.3 734.0 772.2 5.3%
% Margin 8.0% 3.7% 3.9% 4.0% 4.1% 4.2% 4.3% 4.4%
D&A 427.0 575.5 587.4 599.6 609.3 622.0 635.0 645.2
EBIT $709.7 $510.2 $542.2 $573.6 $609.2 $643.3 $678.9 $718.9 5.8%
% Margin 5.0% 3.4% 3.5% 3.6% 3.7% 3.9% 4.0% 4.1%
Net Interest Expense (90.9) (68.5) (43.9) (17.0) 0.2 3.4
Net Income $306.9 $343.5 $384.4 $425.9 $461.8 $491.2 9.9%
EPS $0.24 $0.27 $0.30 $0.33 $0.37 $0.41 11.3%
Average Shares Outstanding 1,273.7 1,273.7 1,273.7 1,273.7 1,248.1 1,191.9
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McOpCo Summ ary Cash Flow and Balance SheetC. McOpCo Financial Analysis
Set forth below are the summary cash flow projections for McOpCo based on theassumptions detailed on page 76.
2006 - 2011
2004A 2005E 2006E 2007E 2008E 2009E 2010E 2011E CAGR
Cash Flow Data
EBITDA $1,129.6 $1,173.3 $1,218.5 $1,265.4 $1,313.9 $1,364.2
less: Cash Taxes (145.1) (163.9) (184.9) (203.9) (218.3) (231.1)
less: Cash Interest Expense (88.7) (61.5) (31.4) (6.1) 3.4 3.4
less: Dividends 0.0 0.0 0.0 0.0 0.0 0.0less: Change in Working Capital 6.2 6.5 6.7 7.0 7.2 7.5
less: Growth CapEx (30.0) (30.6) (31.2) (31.8) (32.5) (33.1)
less: Maintenance CapEx (504.0) (514.5) (525.3) (536.2) (547.4) (558.8)
Free Cash Flow (after dividends) $367.9 $409.3 $452.5 $494.3 $526.3 $552.0 8.5%
Free Cash Flow per share (before dividends) $0.29 $0.32 $0.36 $0.39 $0.44 $0.49 11.1%
Balance Sheet Data
Cash 150.0 150.0 150.0 150.0 150.0 150.0 150.0
Revolver 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Long-Term Debt 1,500.0 1,132.1 722.8 270.3 0.0 0.0 0.0
Total Debt / EBITDA 1.4x 1.0x 0.6x 0.2x 0.0x 0.0x 0.0x
Net Debt / EBITDA 1.2x 0.9x 0.5x 0.1x -0.1x -0.1x -0.1x
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A Plan to Win / Win
January 18, 2006
Pershing SquareCapital Management
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DISCLAIMER
Pershing Square Capital Management's ("Pershing") analysis and conclusions regarding
McDonald's Corporation ("McDonald's or the Company) are based on publicly available
information. Pershing recognizes that there may be confidential information in the possession of
the Company and its advisors that could lead them to disagree with Pershings conclusions or the
approach Pershing is advocating.
The analyses provided include certain estimates and projections prepared with respect to, among
other things, the historical and anticipated operating performance of the Company. Such
statements, estimates, and projections reflect various assumptions by Pershing concerning
anticipated results that are inherently subject to significant economic, competitive, and other
uncertainties and contingencies and have been included solely for illustrative purposes. No
representations, express or implied, are made as to the accuracy or completeness of such
statements, estimates or projections or with respect to any other materials herein. Actual results
may vary materially from the estimates and projected results contained herein.
Pershing manages funds that are in the business of trading - buying and selling - public securities.
It is possible that there will be developments in the future that cause Pershing to change its position
regarding the Company and possibly reduce, dispose of, or change the form of its investment in the
Company. Pershing recognizes that the Company has a stock market capitalization in excess of
$40bn, and that, accordingly, it could be more difficult to exert influence over its Board than hasbeen the case with smaller companies.
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AgendaA Revised Proposal for Creating Value
at McDonalds
Background of our involvement
What are our objectives?
Brief review of our Initial Proposal
Our Revised Proposal
Benefits of our Revised Proposal
9 Company
9 Franchisees
9 Shareholders
Q & A
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Pershings Involvement with McDonalds
September 22, 2005: Pershing Square Capital Management(Pershing) presented a proposal for increasing shareholdervalue (Initial Proposal) to McDonalds management
October 31, 2005: McDonalds management communicated itsresponse to our Initial Proposal
f Management believed that our Initial Proposal (1) would result in potential
frictional costs; (2) could have an unfavorable credit impact; and (3)
could create system issues
f McDonalds believed, based on its advisors valuation, that there was not
enough value creation to outweigh frictional costs and other concerns
November 15, 2005: Pershing presented the Initial Proposal to
the investment community
f Since November 15, we have had numerous discussions with shareholders
and franchisees from around the world
Today we would like to share our Revised Proposal for
Creating Significant Value at McDonalds which incorporatesfeedback from McDonalds management, franchisees and othershareholders
A Revised Proposal for Creating Value
at McDonalds
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What Are Our Objectives?A Revised Proposal for Creating Value
at McDonalds
In developing our Revised Proposal, our objectivesare to:
9Improve McOpCos operating performance
9Strengthen the McDonalds System
9Unlock significant shareholder value
We believe our Revised Proposal will:
fAchieve these objectives
fAddress all of the Companys concerns regarding our
first proposal
f Increase McDonalds share price to $46-$50 per share
(before considering any operational benefits)fMinimize execution risk and management distraction
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Objective 1:
Improve McOpCos Operating
Performance
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Objective 1: Improve McOpCos OperatingPerformance
McOpCo, as a wholly owned subsidiary, is not
achieving its full business and financial potential
fMcOpCo does not pay a market rent or a franchise fee, unlike a
typical franchisee
f Adjusting for a market rent and a franchise fee, McOpCo haslower average unit margins than those of an average U.S.
franchisee
fCorporate subsidies in the form of uncharged rent anduncharged franchisee fees have led to McOpCo being run
inefficiently over time
Uneconomical capital allocation decisions
Suboptimal pricing policy
A Revised Proposal for Creating Value
at McDonalds
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Objective 1: Improve McOpCos OperatingPerformance (contd)
Estimated 4-Wall EBITDA Margins
12.7%
8.8%
14.8%
0%
4%
8%
12%
16%
Avg. U.S. McOpCo Avg. Intl. McOpCo Avg. U.S. Franchise
Estimated4-WallEBITDAM
argin%
Adjusted for a Market Rent and Franchise Fee
(1)
(1)
(2)
McOpCos Estimated Average Unit EBITDA marginsversus
U.S. Franchisees Estimated Average Unit EBITDA margins(1)
________________________________________________
Note: See page 57 of the Appendix for Pershings detailed assumptions.1) Analysis is based on Pershings estimates using 2004 financial data. McDonalds does not provide average unit data for McOpCo or McDonalds franchisees in its
public financials. Assumes a market rent of 9% of sales and a franchise fee of 4% of sales.2) Based on $260k of average EBITDA per franchised store and average revenues per franchised store of approximately $1,760k.
A Revised Proposal for Creating Value
at McDonalds
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Objective 1: Improve McOpCos OperatingPerformance (contd)
McOpCo managers do not have appropriate
compensation incentives
fNo direct equity compensation in McOpCos business
fNo market-based performance measurement system
fFarm Team mentality whereby the best McOpCo
managers are promoted to corporate McDonalds
If they dont join corporate McDonalds, theysometimes leave to become a franchisee
fTop restaurant operators need more incentive to
stay at McOpCo
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at McDonalds
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Objective 1:Improve McOpCos OperatingPerformance (contd)
Earn the Right to Own
McOpCos restaurant portfolio needs to be optimized in order to improve margins and capital allocation
A Revised Proposal for Creating Value
at McDonalds
Refranchise selectunits in mature
markets
Redeploy capital andresources in
emerging markets
McOpCo
increases focuson emergingmarkets growth
f Because of their developed franchise systems,mature markets do not need the same capital or
resources as emerging markets
f e.g., U.S., Canada and U.K.
f Capital and freed-up resources from refranchising
should be redeployed in fast growing / high return
emerging QSR markets
Regions where franchise laws are still in
infancy and McDonalds franchise base is notyet sufficient to drive growth
e.g., China and Russia
f McOpCo should increase its focus on profitable
emerging markets growth
McOpCo
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Confidential
Objective 2:
Strengthen the McDonalds
System
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Objective 2: Strengthen the McDonaldsSystem
(1) Inherent conflict between McDonalds and the Franchisees:McDonalds Top-line focus versus Franchisees Bottom-line focus
fMcDonalds makes the bulk of its profits from the franchisees top line
f However, top line same-store sales growth does not always translate into improving franchisees
bottom line
Stock market often rewards McDonalds for higher same store sales growth even though the
franchisees are sometimes pressured to sacrifice margin for discount pricing
(2) McOpCo, with its subsidized economics, magnifies this conflict
f McOpCo does not compete on equal footing because it does not pay a market rent or franchisee fee
f Suboptimal pricing or capital allocation decisions do not impact McOpCos financials as
dramatically as those of franchisees
f Perception among franchisees is that McOpCo is not held to the same degree of accountability
A Revised Proposal for Creating Value
at McDonalds
Pershing spoke with franchisees from around the world. Heres what they told us:
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(3) Capital allocation criteria / decision-making process varies between McOpCo
and the franchisee community
f Low ROIC investments are occasionally forced upon franchisees
fMcOpCo regional managers often make capital investment decisions they will not have to live with,
given their status as salaried employees with limited tenure in any one position
f Made for Youprogram is an example of a historical capital investment decision that may have
been amended or prevented by an arm's-length McOpCo
Hundreds of millions of dollars of capital invested in a kitchen system that is widely
considered inefficient For many franchisees, it has led to decreased profitability, increased wait times and increased
staffing requirements
Testing at McOpCo did not reveal the true economic impact of the program
Made for You problems could have been prevented if the system had the appropriatechecks and balances
Strengthening the McDonalds System:What Franchisees Had to SayA Revised Proposal for Creating Value
at McDonalds
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(4) McOpCo undercuts on pricing
fMcOpCos subsidized economics reduce the impact of lower margin product pricing decisions
f As such, approximately 27% (1) of the McDonalds system currently does not price optimally
Reduces the profitability of the entire system
f Underpricing at McOpCo pressures franchisees to sacrifice penny profits for traffic
and sales volume
(5) McDonald
s should retain control of McOpCof Franchisees generally agreed that control of McOpCo should remain with McDonalds
Keeps the franchisee vote democratic and dispersed
A Revised Proposal for Creating Value
at McDonalds
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(1): Based on approximately 8,119 McOpCo restaurants out of 30,516 systemwide McDonalds restaurants, as of 2004.
Strengthening the McDonalds System:What Franchisees Had to Say(contd)
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Strengthening the McDonalds System:What Franchisees Had to Say(contd)
(6) Strong interest in owning new units / McOpCo refranchising program
f Franchisees have a strong interest in buying McOpCo restaurants
Given McDonalds exclusivity requirements for franchisees, the only opportunity for
franchisees to materially increase their wealth is to own more McDonalds units
f A refranchising program would create an attractive incentive system
Would allow the top quartile performing operators to be rewarded with an opportunity to
increase units
fMcOpCos current portfolio of restaurants needs to be rationalized through refranchising,in order to
Increase McOpCos profitability
Improve systemwide same-store sales growth
Satisfy considerable franchisee demand
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at McDonalds
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Objective 3:
Unlock Shareholder Value
Final Revised Proposal.ppt
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Objective 3: Unlock Shareholder Value atMcDonalds
fMcDonalds controls
substantially all of its
systemwide real estate
fEarns 9% of systemwide
unit sales as rent
fFor real estate it does not
own, it pays a rent expenseand generates income
through subleases
fApproximately 32,000
restaurants where
McDonalds receives 4%
of unit sales
Franchise
Restaurant Operations
Real Estate
Brand McDonalds McOpCo
fOver 8,000 McDonalds
company operated
restaurants
A Revised Proposal for Creating Value
at McDonalds
Collects a royalty of 13% of systemwide sales
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Objective 3: Unlock Shareholder Value atMcDonalds (contd)
FranchiseReal Estate
Brand McDonalds
A Revised Proposal for Creating Value
at McDonalds
Collects a royalty of 13% of systemwide sales
9 World-leading brand
9 ~ 60% EBITDA Margins (1)
9 Low maintenance capital requirements
9 ~ 55% EBITDA maintenance capex margins (1)
9 Low operating leverage / high earnings
stability
9 High ROIC
9 Low cost of capital
9 Valuable fixed asset base
9 50 year track record9 Global and diverse customer base
There are very fewbusinesses in theworld with all the
attractive businesscharacteristics ofBrand McDonalds
________________________________________________
(1) Based on Pershings estimates. AssumesMcOpCo pays a market rent and franchisefee.
.
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Objective 3: Unlock Shareholder Value atMcDonalds (contd)
Financial statements are not transparent
fMcOpCo does not pay an arm's-length rent or franchise fee
to Brand McDonalds
fAs such, reported financials do not make apparent that
approximately 80% of McDonalds EBITDA is derived fromthe higher multiple Brand McDonalds
f Issuing transparent segment financials for McOpCo and
Brand McDonalds would demonstrate
9 True profitability of Brand McDonalds
9 True operating margins and capital requirements at
McOpCo
A Revised Proposal for Creating Value
at McDonalds
The first step tounlockingshareholder valueis to introducetransparent
segment financials.
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Objective 3: Unlock Shareholder Value atMcDonalds (contd)
2004 Total EBITDA Adjusted forMarket Rent and Franchise Fees
55%
2004 Total EBITDAAs Reported
In 2004, McDonalds company-operated restaurants appeared to contribute 46% of total EBITDA.However, once adjusted for a franchise fee and a market rent fee, McOpCo constituted only 22% of totalEBITDA, with Brand McDonalds contributing 78% of total EBITDA.
________________________________________________
Note: The analysis assumes that 75% of the total G&A is allocated to Brand McDonalds business and 25% is allocated to McOpCo. McDonalds management has indicated this is aconservative assumption regarding Brand McDonalds. Analysis excludes $441 mm of non-recurring other net operating expenses.
.
A Revised Proposal for Creating Value
at McDonalds
46%
54%
McOpCo
Brand McDonald's
2004 EBITDA %McOpCo $2.4bn 46%
Brand McDonald's 2.8bn 54%
Total $5.2bn 100%
78%
22%McOpCo
Brand McDonald's
2004 EBITDA %McOpCo $1.1bn 22%
Brand McDonald's 4.1bn 78%
Total $5.2bn 100%
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Objective 3: Unlock Shareholder Value atMcDonalds (contd)
McDonalds is fundamentallyNot a restaurant company
Why is it valued as such?_________________________________________
(1) FY05E EBITDA- Maintenance CapEx contribution is based on Pershings estimates. CapEx is net of proceeds from restaurant closings. We note that the Company does not provide
EBITDA and Maintenance CapEx allocation by segment.
McDonalds FY 2005EEBITDA Maintenance CapEx, Adjusted for a
Market Rent and Franchise Fee(1)
A Revised Proposal for Creating Value
at McDonalds
86%